This year, Commonwealth Financial Services celebrates its 20th anniversary as a firm. Over that time, we have made many changes. Those evolutions culminated this year as our firm became an independent Registered Investment Advisor.
The financial services industry confuses many people. Many different firms serve different roles and the lines between them lead to confusion. Today on Wealth Wednesday, we try to clarify those roles. There are some important distinctions that impact how you seek planning and advice.
In addition, we have introduced a new name into the mix. Charles Schwab now serves as our primary custodian. We explain the role and function of the custodian and why we selected Charles Schwab to fill that role.
Watch Now: CFS at 20 Years: A New Chapter
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The Types of Firms in the Financial Services Industry
Banks, Insurance Companies, Broker-Dealers, and Registered Investment Advisory firms are the primary actors in our industry. Each provides a distinct service. Likewise, they also operate in multiple spaces. Most of this causes confusion for you, the consumer.
Many banks have an investment department, an insurance division, and financial advisors on staff. Many years ago, insurance companies also branched out into the investment world. Many broker-dealers also dabble in all three spaces.
Most of us recognize the role banks play in our daily lives. These companies provide deposit accounts and loans to individuals and businesses. The banks soon realized their core function wasn’t enough. Many began providing insurance products and investment services.
Most people recognize a brokerage firm when they hear their names. The “wirehouse” firms include some of the oldest and biggest names in our industry. Their messaging focuses on the company’s name more than the local representative.
Independent broker-dealers tend to operate in the background, allowing the local representatives to focus on building their own brand and image. Until April, 1, Commonwealth was affiliated with an independent broker-dealer.
The broker-dealer serves a specific function. They buy and sell securities. And they generate their revenue through commissions. The financial incentives for both the firm and the representatives of those firms are to buy and sell products for their clients.
Many life insurance companies entered into the investment space many decades ago, and many created their own broker-dealer to provide these hybrid insurance/investment products. Agents who represent these companies also receive commissions for the products they sell to their clients. Many firms also provide incentives or enforce quotas on their agents to encourage the sale of products.
Investment advisory firms focus on providing financial advice and financial planning. But one key area IAs differ from the others is how they generate income. Investment advisory firms charge a fee directly to their clients for the services they provide. The revenue does not come from the sale of products.
Blurring Lines With Hat Switching
In many situations, the person you speak to wears many hats. They can be an agent representing an insurance company, a broker representing the broker-dealer, and an investment advisor representative representing an IA. They earn their income through both product sales and advisory fees. This makes it very difficult for clients to understand how they are paying for the help they need.
One is not better than the other…
Many people debate whether a fee-for-service structure or a commission-based structure is better for the consumer. In some instances, you can argue a commission-based relationship makes sense. But in other cases, the fee-for-service relationship can reduce many conflicts of interest that surround financial incentives for the professional you contact. Understanding where the line is drawn between the two creates some challenges.
Fiduciary vs. Suitability
Investment advisory firms are held to a fiduciary standard, meaning they are required to put the interests of their clients first. Broker-Dealer and insurance companies follow the suitability standard. This means they have to justify a product as being appropriate for their client.
Why we chose to become an independent Investment Advisor
Those blurred lines cause confusion and skepticism. You no longer have to worry about hat switching. There is not a sales pitch for an elaborate product that can be justified as suitable when it isn’t in your best interest. It eliminates any confusion about the role we have in our relationship.
Following the golden rule…
Treat others the way you wish to be treated. Working in the best interests of our clients follows our core beliefs and principles. Nobody likes to walk away from a meeting wondering if you just heard a slick and fancy sales pitch. In our opinion, the suitability standard allows for some creative ways to force round pegs into square holes, and that isn’t always what is best for you.
Flexibility and Control
Being an independent IA firm allows for more flexibility and more control over how we help you. Anyone who has worked for a large corporation knows there are many layers of decision-makers who say what can and can’t be done. Many times, those decision-makers are more worried about protecting the firm rather than doing what is right for the client.
Now our firm, with roots in our communities, makes all of those decisions.
What is a Custodian and Why Did We Pick Charles Schwab?
Custodians serve an important role in our industry. They hold your investments and do all of the official record-keeping. This is critical, as it protects you. Our firm does not have possession of your investments. This helps you avoid a Bernie Madoff-type situation.
Secondly, they act as the broker-dealers and execute the trades in your accounts. Someone has to do it, and they provide this function. And they do it at a low cost to our clients.
Charles Schwab is the biggest custodian in the industry. Of the major firms who provide this service to independent RIA’s, it is a focus of their business. They continually invest in technology and tools to help us be more efficient.
For some clients, we retained Fidelity as the custodian. In those situations, it was the best fit. It also gives us the flexibility to find the best fit for our clients in the future.
Start Your Journey…
How can we help you create a better future? It starts with a simple 15-20 minute conversation. We can find out more about you, what you want to achieve, and how we can create a plan to help you get there.
Appearing in this episode...
Todd Kimpel, CLU®, ChFC®
Todd is one of the founding partners of Commonwealth. He began helping clients plan for their future more than 40 years ago.
Mike Seese, CFP®
Mike is also a founding partner of Commowealth. He began his career in 1996.
Neal Watson CFP®
Neal joined the Commonwealth team in 2021, bringing 27 years of experience to the firm.